Just watched a Webinar by Vanguard & about to go to a "lunch event" by Jupiter so have a bit more insight as to where the professionals see things going.
Vanguard are saying base rate to peak at 6% next year & then falling back to 3% by 2028. The fall would have been quicker had we not had the mini budget.
Inflation similarly to peak next year at 10.8% and then fall back to 2%-3% by the end of next year. They are saying that it will be some time since we had base rate more than inflation.
Bond values to start picking up & in Sterling terms UK equities have not performed as badly as other countries. Europe looking likeit's been oversold & they can see more gains here than elsewhere. The US is close to its long trend numbers & so the sell off there hopefully is almost done.
A 60/40 portfolio has shown returns of between 6%-8% over the long term and is still the go-to asset split for the balanced investor. So ride out this wave & look forward to positive returns next year.
Just watched a Webinar by Vanguard & about to go to a "lunch event" by Jupiter so have a bit more insight as to where the professionals see things going.
Vanguard are saying base rate to peak at 6% next year & then falling back to 3% by 2028. The fall would have been quicker had we not had the mini budget.
Inflation similarly to peak next year at 10.8% and then fall back to 2%-3% by the end of next year. They are saying that it will be some time since we had base rate more than inflation.
Bond values to start picking up & in Sterling terms UK equities have not performed as badly as other countries. Europe looking likeit's been oversold & they can see more gains here than elsewhere. The US is close to its long trend numbers & so the sell off there hopefully is almost done.
A 60/40 portfolio has shown returns of between 6%-8% over the long term and is still the go-to asset split for the balanced investor. So ride out this wave & look forward to positive returns next year.
Now to see what Jupiter think.
Thanks for the info Golfie - keep it coming please!
Just watched a Webinar by Vanguard & about to go to a "lunch event" by Jupiter so have a bit more insight as to where the professionals see things going.
Vanguard are saying base rate to peak at 6% next year & then falling back to 3% by 2028. The fall would have been quicker had we not had the mini budget.
Inflation similarly to peak next year at 10.8% and then fall back to 2%-3% by the end of next year. They are saying that it will be some time since we had base rate more than inflation.
Bond values to start picking up & in Sterling terms UK equities have not performed as badly as other countries. Europe looking likeit's been oversold & they can see more gains here than elsewhere. The US is close to its long trend numbers & so the sell off there hopefully is almost done.
A 60/40 portfolio has shown returns of between 6%-8% over the long term and is still the go-to asset split for the balanced investor. So ride out this wave & look forward to positive returns next year.
Now to see what Jupiter think.
Interesting insight from respected sources. But don't forget that Vanguard and Jupiter have a vested interest ... estate agents rarely call house price crashes.
I think they are optimistic on the US. One of the analysts I follow say the S&P is fairly valued right now, assuming the current forecasts of 10% earnings YoY the next two years. If that turns out to be wrong - and we'll find during the October earnings season - the US could go down another 20% more on Nasdaq. And they're the optimistic crowd, hoping that earnings and forecasts hold out!
Another analyst I follow called this dip perfectly, despite generally being an optimist on the market (one the of the guys that taught me options trading and has been in the market since the early 70s). He reckons this is 73/74 all over again and there's a real risk of carnage in the next 6 months - 50% from the top. 3000 only takes us back to pre-pandemic levels, so makes sense to me, 2400 (50%) would be a not unreasonable overshoot.
Both analysts expect a bear market rally to at least 3900, btw before dropping again during earnings season.
I also very much doubt that rates will go to 6% - the debt market is very, very sensitive, so should require less of a rise to signal. I reckon the last week has probably put a brake on the housing market immediately and we'll see well overdue house price falls. Then the energy cap and falling commodities will bring inflation down relatively quickly. The 6-7% forecasts were all based on Nat Gas at more than double the price it is now and no energy cap. Plus, the Bank has already blinked.
Another data point is that my private equity clients have just given me my second turn-around project in two weeks - manufacturers with order books disappearing in weeks and cost bases being wrecked by power and materials costs. Other than fast-growing tech firms, I don't know a company that isn't looking to cut jobs, unfortunately. But Private Equity are also bargain hunting in UK/Europe due to the strong dollar, so I'm with them on being positive on UK/Europe medium to long-term.
BoE to buy bonds. FTSE100 running back turbo on the news. £ getting ready to take another nose dive
Umm...still below 7,000...
not for much longer
Well, I've had lunch and the graph is pointing back downwards again...
But you got the sterling prediction right at least. Below 1.06 again. Thankfully I managed to move some cash earlier in the week to the safe haven known as the Czech koruna. What a time to be alive
About to poke it's head above 7000...
floating around the 6990-7000 level.
now above 7000.
7005. A full 0.03% up on the day. Uncork the Krug!
But don't jump up and down on that "floor". It still has two more days of KamiKwasi to endure before the weekend
And a 2% swing in price over the day. Momentum is back with the bulls for the next few days.
BoE to buy bonds. FTSE100 running back turbo on the news. £ getting ready to take another nose dive
Umm...still below 7,000...
not for much longer
Well, I've had lunch and the graph is pointing back downwards again...
But you got the sterling prediction right at least. Below 1.06 again. Thankfully I managed to move some cash earlier in the week to the safe haven known as the Czech koruna. What a time to be alive
About to poke it's head above 7000...
floating around the 6990-7000 level.
now above 7000.
7005. A full 0.03% up on the day. Uncork the Krug!
But don't jump up and down on that "floor". It still has two more days of KamiKwasi to endure before the weekend
And a 2% swing in price over the day. Momentum is back with the bulls for the next few days.
That‘s not the mood music being played by the likes of Jim O‘Neill on the radio just now. He‘s going to be happy if we dont all fall off another cliff tomorrow. That index needs to crawl back up to beyond 7,300 to restore pre— Kamikwazi speech levels. FTSE250, which far better represents actual UK business, has to recover over 8%.
oh, dont get me wrong, it'll limp to 7250 and then go into free-fall. But if you fancied a flutter.
I'm in no mood for a flutter (well I'm approx twice your age, I believe, so I wouldn't be), and today's opening market moves haven't exactly dispelled that mood.
Pound has opened steadier though, so looks like so far the BoE bail out of KamiKwazi is holding.
The question is, for old gits with cash, (but in my case without either of the pension types that @Dippenhall mentions above in his usual insightful way) is it time to dip into the market in search of funds or even equity stocks that produce reliable income flows? One problem is that if you look for such income in global rather than UK markets, but are of necessity buying with pounds, the price is more expensive than it was, and you have to consider not just what the fund/stock may do, but what the pound will do. Has the BoE created a floor now? Many seem to doubt it, (I think it was JP Morgan forecasting £1 - $0.95) but I am not sure if that's real or just for dramatic effect.
Any further thoughts for disorientated mug punters especially from @Dippenhall and @WishIdStayedinthePub would be much appreciated!
DLG shares are good value right now, historically paid a good dividend.
Direct Line. I recall taking a look the last time I asked for tips about income, and didnt like the noises around them but you are right, the fall in share price since then does make them look good value right now. Thanks!
Don't know if anyone has picked up that on the one hand we are told pension funds are collapsing and need to be protected by B of E intervention on interest rates and the value of the pound, and on the other hand final salary pension schemes have massively improved their funding position and now likely to have surplus funds. Companies with legacy final salary schemes are jumping for joy at the fall in the value of bonds and gilts. The overall value of these pension funds can fall yet they can be holding more investments than needed to pay their pensioners.
There's no difference between the cost of a pension guaranteed by a final salary scheme and the cost of a pension funded from an individual's personal pension pot, so why a crisis for some pensions and not for others.
The difference is that individuals, without any conscious decision, choose to fund pension income from capital growth, which tends to be volatile and unpredictable. On the other hand, companies funding final salary guarantees are forced by regulation to buy advance income in the form of bonds and gilts. If interest rates are low, as they have been for decades, the cost of buying £1 of income is high because the price of gilts is high and vice versa. If interest rates are rising (their yield increases) as now, the price of gilts falls and the effect is that £1 buys more guaranteed income i.e a 1% yield is expensive and a 5% yield is cheap.
Individuals intuitively choose to take more risk by relying more on capital growth prior to retirement BUT as soon as they retire and need to draw down income they should be thinking more like a company that has a liability to fund a secure income stream. The obsession with fund values falling and rising is irrelevant once you have a basket of bonds and gilts providing a pre-set income yield regardless of what its capital value is. If you need income, what's more valuable - £100K yielding 5% or £200k yielding 1%? In the growth phase before retirement you are targeting as large a cash pot at retirement as possible that you can convert to income at retirement. Short term fund value volatility far from retirement is just noise, but as you approach retirement you should not be so concerned with fund value if your pension pot, like a final salary scheme, has at least in part bought future income in the form of bonds and gilts. If you are close to, or in retirement, and still invested wholly in equities you are choosing to rely on capital growth and you are bearing the full risk of market volatility affecting capital values. "Lifestyle" investing is the norm for many pension products and this product automatically does the de-risking into bonds and gilts as you approach retirement without you having to take any action.
The fall in the value of the pound means pension funds invested in non-UK investments are filling their boots with increased value as Dollars earned overseas are converted into ever more pounds. Most fund managers offer two varieties of overseas fund investments - those which bear the currency exchange risk and those which hedge the Sterling currency exchange risk. The latter will perform below un-hedged funds all the time sterling is weak. In fact currency exchange gains in un-hedged funds account for a significant percentage of the buoyant performance of overseas equity investment.
Inflation is the risk that pension investors approaching should be most concerned with.
Investors suffering the most as a result of high interest rates, falling UK markets and falling pound are those which are poorly managed or are obsessed with prevailing fund value.
Spot on. Reports that 'pension funds' were close to meltdown due to cash calls can't be right for the reasons you state - why would pension funds be leveraged? Intervention due to general financial instability ... maybe.
Liability Driven Investment rules dictate that they match their liabilities, largely government or very high investment grade bonds which they would intend to hold to maturity and therefore would know their gross redemption yield at the start. I suppose it is possible that some were panicking due to inflation and trying to hedge that with derivatives? That would be another scandal brewing, if true.
It' a happy coincidence that the Bank's intervention will keep borrowing costs down for the Government, of course. Anyone still think that any of the central banks are actually independent? Lol.
Don't know if anyone has picked up that on the one hand we are told pension funds are collapsing and need to be protected by B of E intervention on interest rates and the value of the pound, and on the other hand final salary pension schemes have massively improved their funding position and now likely to have surplus funds. Companies with legacy final salary schemes are jumping for joy at the fall in the value of bonds and gilts. The overall value of these pension funds can fall yet they can be holding more investments than needed to pay their pensioners.
There's no difference between the cost of a pension guaranteed by a final salary scheme and the cost of a pension funded from an individual's personal pension pot, so why a crisis for some pensions and not for others.
The difference is that individuals, without any conscious decision, choose to fund pension income from capital growth, which tends to be volatile and unpredictable. On the other hand, companies funding final salary guarantees are forced by regulation to buy advance income in the form of bonds and gilts. If interest rates are low, as they have been for decades, the cost of buying £1 of income is high because the price of gilts is high and vice versa. If interest rates are rising (their yield increases) as now, the price of gilts falls and the effect is that £1 buys more guaranteed income i.e a 1% yield is expensive and a 5% yield is cheap.
Individuals intuitively choose to take more risk by relying more on capital growth prior to retirement BUT as soon as they retire and need to draw down income they should be thinking more like a company that has a liability to fund a secure income stream. The obsession with fund values falling and rising is irrelevant once you have a basket of bonds and gilts providing a pre-set income yield regardless of what its capital value is. If you need income, what's more valuable - £100K yielding 5% or £200k yielding 1%? In the growth phase before retirement you are targeting as large a cash pot at retirement as possible that you can convert to income at retirement. Short term fund value volatility far from retirement is just noise, but as you approach retirement you should not be so concerned with fund value if your pension pot, like a final salary scheme, has at least in part bought future income in the form of bonds and gilts. If you are close to, or in retirement, and still invested wholly in equities you are choosing to rely on capital growth and you are bearing the full risk of market volatility affecting capital values. "Lifestyle" investing is the norm for many pension products and this product automatically does the de-risking into bonds and gilts as you approach retirement without you having to take any action.
The fall in the value of the pound means pension funds invested in non-UK investments are filling their boots with increased value as Dollars earned overseas are converted into ever more pounds. Most fund managers offer two varieties of overseas fund investments - those which bear the currency exchange risk and those which hedge the Sterling currency exchange risk. The latter will perform below un-hedged funds all the time sterling is weak. In fact currency exchange gains in un-hedged funds account for a significant percentage of the buoyant performance of overseas equity investment.
Inflation is the risk that pension investors approaching should be most concerned with.
Investors suffering the most as a result of high interest rates, falling UK markets and falling pound are those which are poorly managed or are obsessed with prevailing fund value.
Spot on. Reports that 'pension funds' were close to meltdown due to cash calls can't be right for the reasons you state - why would pension funds be leveraged? Intervention due to general financial instability ... maybe.
Liability Driven Investment rules dictate that they match their liabilities, largely government or very high investment grade bonds which they would intend to hold to maturity and therefore would know their gross redemption yield at the start. I suppose it is possible that some were panicking due to inflation and trying to hedge that with derivatives? That would be another scandal brewing, if true.
It' a happy coincidence that the Bank's intervention will keep borrowing costs down for the Government, of course. Anyone still think that any of the central banks are actually independent? Lol.
Some pension funds did interest rate swaps where a bank pays a fixed rate of interest and the pension fund pays a market rate of interest. Without trying to explain how, you can take it that pension funds pay additional cash as collateral for the increased exposure under the swap contract when interest rates rise and the pension fund has to cover the higher interest payments. BUT the loss is covered by the reduced value of assets the pension fund needs. The pension fund has matched its liabilities and there is no risk to pensioners. The problem is that pension funds have to sell the surplus assets to meet both cash call and this can move the market temporarily. So it’s a short term liquidity issue, not an increase in pensioner risk. The interest rate swap has behaved as it would be expected and the surprise is because pension fund trustees didn’t understand what’ they had entered into by selling off in advance the value of surplus assets through derivatives.
Don't know if anyone has picked up that on the one hand we are told pension funds are collapsing and need to be protected by B of E intervention on interest rates and the value of the pound, and on the other hand final salary pension schemes have massively improved their funding position and now likely to have surplus funds. Companies with legacy final salary schemes are jumping for joy at the fall in the value of bonds and gilts. The overall value of these pension funds can fall yet they can be holding more investments than needed to pay their pensioners.
There's no difference between the cost of a pension guaranteed by a final salary scheme and the cost of a pension funded from an individual's personal pension pot, so why a crisis for some pensions and not for others.
The difference is that individuals, without any conscious decision, choose to fund pension income from capital growth, which tends to be volatile and unpredictable. On the other hand, companies funding final salary guarantees are forced by regulation to buy advance income in the form of bonds and gilts. If interest rates are low, as they have been for decades, the cost of buying £1 of income is high because the price of gilts is high and vice versa. If interest rates are rising (their yield increases) as now, the price of gilts falls and the effect is that £1 buys more guaranteed income i.e a 1% yield is expensive and a 5% yield is cheap.
Individuals intuitively choose to take more risk by relying more on capital growth prior to retirement BUT as soon as they retire and need to draw down income they should be thinking more like a company that has a liability to fund a secure income stream. The obsession with fund values falling and rising is irrelevant once you have a basket of bonds and gilts providing a pre-set income yield regardless of what its capital value is. If you need income, what's more valuable - £100K yielding 5% or £200k yielding 1%? In the growth phase before retirement you are targeting as large a cash pot at retirement as possible that you can convert to income at retirement. Short term fund value volatility far from retirement is just noise, but as you approach retirement you should not be so concerned with fund value if your pension pot, like a final salary scheme, has at least in part bought future income in the form of bonds and gilts. If you are close to, or in retirement, and still invested wholly in equities you are choosing to rely on capital growth and you are bearing the full risk of market volatility affecting capital values. "Lifestyle" investing is the norm for many pension products and this product automatically does the de-risking into bonds and gilts as you approach retirement without you having to take any action.
The fall in the value of the pound means pension funds invested in non-UK investments are filling their boots with increased value as Dollars earned overseas are converted into ever more pounds. Most fund managers offer two varieties of overseas fund investments - those which bear the currency exchange risk and those which hedge the Sterling currency exchange risk. The latter will perform below un-hedged funds all the time sterling is weak. In fact currency exchange gains in un-hedged funds account for a significant percentage of the buoyant performance of overseas equity investment.
Inflation is the risk that pension investors approaching should be most concerned with.
Investors suffering the most as a result of high interest rates, falling UK markets and falling pound are those which are poorly managed or are obsessed with prevailing fund value.
Spot on. Reports that 'pension funds' were close to meltdown due to cash calls can't be right for the reasons you state - why would pension funds be leveraged? Intervention due to general financial instability ... maybe.
Liability Driven Investment rules dictate that they match their liabilities, largely government or very high investment grade bonds which they would intend to hold to maturity and therefore would know their gross redemption yield at the start. I suppose it is possible that some were panicking due to inflation and trying to hedge that with derivatives? That would be another scandal brewing, if true.
It' a happy coincidence that the Bank's intervention will keep borrowing costs down for the Government, of course. Anyone still think that any of the central banks are actually independent? Lol.
Some pension funds did interest rate swaps where a bank pays a fixed rate of interest and the pension fund pays a market rate of interest. Without trying to explain how, you can take it that pension funds pay additional cash as collateral for the increased exposure under the swap contract when interest rates rise and the pension fund has to cover the higher interest payments. BUT the loss is covered by the reduced value of assets the pension fund needs. The pension fund has matched its liabilities and there is no risk to pensioners. The problem is that pension funds have to sell the surplus assets to meet both cash call and this can move the market temporarily. So it’s a short term liquidity issue, not an increase in pensioner risk. The interest rate swap has behaved as it would be expected and the surprise is because pension fund trustees didn’t understand what’ they had entered into by selling off in advance the value of surplus assets through derivatives.
Well, I'll freely admit I can't get my head around this, so I'll just hope you are right. Not least because I dipped in and bought some Direct Line and LG shares today, and the latter appears to be especially in the mix on this. I took the view the market was already pricing in some fall-out from this for them. I don't know if you have read/can read the article but there are some pretty heavy duty comments on there which seem a lot less sanguine than you are.
Don't know if anyone has picked up that on the one hand we are told pension funds are collapsing and need to be protected by B of E intervention on interest rates and the value of the pound, and on the other hand final salary pension schemes have massively improved their funding position and now likely to have surplus funds. Companies with legacy final salary schemes are jumping for joy at the fall in the value of bonds and gilts. The overall value of these pension funds can fall yet they can be holding more investments than needed to pay their pensioners.
There's no difference between the cost of a pension guaranteed by a final salary scheme and the cost of a pension funded from an individual's personal pension pot, so why a crisis for some pensions and not for others.
The difference is that individuals, without any conscious decision, choose to fund pension income from capital growth, which tends to be volatile and unpredictable. On the other hand, companies funding final salary guarantees are forced by regulation to buy advance income in the form of bonds and gilts. If interest rates are low, as they have been for decades, the cost of buying £1 of income is high because the price of gilts is high and vice versa. If interest rates are rising (their yield increases) as now, the price of gilts falls and the effect is that £1 buys more guaranteed income i.e a 1% yield is expensive and a 5% yield is cheap.
Individuals intuitively choose to take more risk by relying more on capital growth prior to retirement BUT as soon as they retire and need to draw down income they should be thinking more like a company that has a liability to fund a secure income stream. The obsession with fund values falling and rising is irrelevant once you have a basket of bonds and gilts providing a pre-set income yield regardless of what its capital value is. If you need income, what's more valuable - £100K yielding 5% or £200k yielding 1%? In the growth phase before retirement you are targeting as large a cash pot at retirement as possible that you can convert to income at retirement. Short term fund value volatility far from retirement is just noise, but as you approach retirement you should not be so concerned with fund value if your pension pot, like a final salary scheme, has at least in part bought future income in the form of bonds and gilts. If you are close to, or in retirement, and still invested wholly in equities you are choosing to rely on capital growth and you are bearing the full risk of market volatility affecting capital values. "Lifestyle" investing is the norm for many pension products and this product automatically does the de-risking into bonds and gilts as you approach retirement without you having to take any action.
The fall in the value of the pound means pension funds invested in non-UK investments are filling their boots with increased value as Dollars earned overseas are converted into ever more pounds. Most fund managers offer two varieties of overseas fund investments - those which bear the currency exchange risk and those which hedge the Sterling currency exchange risk. The latter will perform below un-hedged funds all the time sterling is weak. In fact currency exchange gains in un-hedged funds account for a significant percentage of the buoyant performance of overseas equity investment.
Inflation is the risk that pension investors approaching should be most concerned with.
Investors suffering the most as a result of high interest rates, falling UK markets and falling pound are those which are poorly managed or are obsessed with prevailing fund value.
Spot on. Reports that 'pension funds' were close to meltdown due to cash calls can't be right for the reasons you state - why would pension funds be leveraged? Intervention due to general financial instability ... maybe.
Liability Driven Investment rules dictate that they match their liabilities, largely government or very high investment grade bonds which they would intend to hold to maturity and therefore would know their gross redemption yield at the start. I suppose it is possible that some were panicking due to inflation and trying to hedge that with derivatives? That would be another scandal brewing, if true.
It' a happy coincidence that the Bank's intervention will keep borrowing costs down for the Government, of course. Anyone still think that any of the central banks are actually independent? Lol.
hedging can be interest rate and inflation but its the interest rate hedging that is the main issue. For interest rate read yields. In the last year the 10 year Gilt yield has gone from sub 20bp ie 0.20% to over 400 bp, ie 4.00% plus. The hedging works when yields drop. However when yields rise there is a collateral call for cash to maintain the hedging. That covers the risk of the yield dropping again.
Aside the political fau par of releasing a budget that was uncosted a week back the global rising yield was problematic because
The Bank of England was just starting Quantitative Tightening, ie selling gilts into the market
Pension funds needed cash for their yield hedge and needed it quickly so in many cases started to sell gilts
Both of these parties had previously been the only real buyers of Gilts. That uncosted budget added a British factor to rising yields that did get out of control.
On Tuesday the yield moved something like 30bp in a day. On Wednesday by 11 am it had moved the same and there was an absence of buyers. In effect an abnormal market and so BoE stepped in, changed tactic and became a buyer, until 14th October at least, ie back to QE. They did this at the long dated end and it has restored the market.
Rising yields improve solvency, even if well hedged and paying away collateral the funding will be getting better. A sort of ‘wealth destruction’ insurance move that removes subjective judgement.
The rise in yields will have significantly improved the funding in expectation and if appropriate a fund could derisk further now by selling equity and buying bonds. It would be helpful to buy bonds of broadly the correct duration. Also similarly the elements that are inflation linked, but there are IL gilts.
The strange thing about all of this is that the pensioner population is the same and their expected life does not change on market conditions. What does change is the present value of the solvency reserve required simply because the acceptable discount rate is now much higher than hitherto.
If gilts yield plus 50bp is the self sufficiency level then a discount rate of say 3.0% may be quite acceptable. If the scheme has no deficit then a switch to that asset delivering yield of more than 3% if it is the risk free asset, ie long gilt (20 year plus) suddenly looks a useful step. Meaningful yields are back on the table.
Mortality is another matter and actually is not getting better post the pandemic, quite the reverse but TPR has the brakes on big changes in that just now.
All of this is looking like positive news for most DB schemes.
For completeness the reporting of insolvent pension funds may have referenced some LDI arrangements set up via limited company structures where the collateral calls could not be met fast enough, ie they could not meet their commitments due to speed and illiquidity in the gilt market. Usually all that occurs is that the hedging gets reduced but I can imagine somewhere out there is a structure without the relief valve. 12 month over 15 year FI Gilt performance is minus 40 % to last Monday. That is a lot of liability lost.
Edited from something I received but may be of interest
I've got a few shares held in certificate form that I want to sell.
Anyone able to recommend a [relatively] cheap and reliable place where I can sell them.
Seen the sellmysharecertificates.com site Anyone used it?
I had certificate shares. On looking around it seemed clear it was cheaper to transfer them to uncertified first and then sell them. Depends on the value though and also takes longer with the exptra process. I used halifax who were pretty efficent but suspect there are cheaper
More lender mortgage rates been sent to me today. Scottish Widows being the most expensive with 5 year fixed at 6.49% for a 60% LTV, whereas Barclays are offering their existing customers 4.89% for the same LTV.
Halifax meanwhile have their 5 year fix at 5.44% for all LTV's up to 90%. Their 2 year fixed is 5.84%.
I've got a few shares held in certificate form that I want to sell.
Anyone able to recommend a [relatively] cheap and reliable place where I can sell them.
Seen the sellmysharecertificates.com site Anyone used it?
I had certificate shares. On looking around it seemed clear it was cheaper to transfer them to uncertified first and then sell them. Depends on the value though and also takes longer with the exptra process. I used halifax who were pretty efficent but suspect there are cheaper
Don't know if anyone has picked up that on the one hand we are told pension funds are collapsing and need to be protected by B of E intervention on interest rates and the value of the pound, and on the other hand final salary pension schemes have massively improved their funding position and now likely to have surplus funds. Companies with legacy final salary schemes are jumping for joy at the fall in the value of bonds and gilts. The overall value of these pension funds can fall yet they can be holding more investments than needed to pay their pensioners.
There's no difference between the cost of a pension guaranteed by a final salary scheme and the cost of a pension funded from an individual's personal pension pot, so why a crisis for some pensions and not for others.
The difference is that individuals, without any conscious decision, choose to fund pension income from capital growth, which tends to be volatile and unpredictable. On the other hand, companies funding final salary guarantees are forced by regulation to buy advance income in the form of bonds and gilts. If interest rates are low, as they have been for decades, the cost of buying £1 of income is high because the price of gilts is high and vice versa. If interest rates are rising (their yield increases) as now, the price of gilts falls and the effect is that £1 buys more guaranteed income i.e a 1% yield is expensive and a 5% yield is cheap.
Individuals intuitively choose to take more risk by relying more on capital growth prior to retirement BUT as soon as they retire and need to draw down income they should be thinking more like a company that has a liability to fund a secure income stream. The obsession with fund values falling and rising is irrelevant once you have a basket of bonds and gilts providing a pre-set income yield regardless of what its capital value is. If you need income, what's more valuable - £100K yielding 5% or £200k yielding 1%? In the growth phase before retirement you are targeting as large a cash pot at retirement as possible that you can convert to income at retirement. Short term fund value volatility far from retirement is just noise, but as you approach retirement you should not be so concerned with fund value if your pension pot, like a final salary scheme, has at least in part bought future income in the form of bonds and gilts. If you are close to, or in retirement, and still invested wholly in equities you are choosing to rely on capital growth and you are bearing the full risk of market volatility affecting capital values. "Lifestyle" investing is the norm for many pension products and this product automatically does the de-risking into bonds and gilts as you approach retirement without you having to take any action.
The fall in the value of the pound means pension funds invested in non-UK investments are filling their boots with increased value as Dollars earned overseas are converted into ever more pounds. Most fund managers offer two varieties of overseas fund investments - those which bear the currency exchange risk and those which hedge the Sterling currency exchange risk. The latter will perform below un-hedged funds all the time sterling is weak. In fact currency exchange gains in un-hedged funds account for a significant percentage of the buoyant performance of overseas equity investment.
Inflation is the risk that pension investors approaching should be most concerned with.
Investors suffering the most as a result of high interest rates, falling UK markets and falling pound are those which are poorly managed or are obsessed with prevailing fund value.
Spot on. Reports that 'pension funds' were close to meltdown due to cash calls can't be right for the reasons you state - why would pension funds be leveraged? Intervention due to general financial instability ... maybe.
Liability Driven Investment rules dictate that they match their liabilities, largely government or very high investment grade bonds which they would intend to hold to maturity and therefore would know their gross redemption yield at the start. I suppose it is possible that some were panicking due to inflation and trying to hedge that with derivatives? That would be another scandal brewing, if true.
It' a happy coincidence that the Bank's intervention will keep borrowing costs down for the Government, of course. Anyone still think that any of the central banks are actually independent? Lol.
Some pension funds did interest rate swaps where a bank pays a fixed rate of interest and the pension fund pays a market rate of interest. Without trying to explain how, you can take it that pension funds pay additional cash as collateral for the increased exposure under the swap contract when interest rates rise and the pension fund has to cover the higher interest payments. BUT the loss is covered by the reduced value of assets the pension fund needs. The pension fund has matched its liabilities and there is no risk to pensioners. The problem is that pension funds have to sell the surplus assets to meet both cash call and this can move the market temporarily. So it’s a short term liquidity issue, not an increase in pensioner risk. The interest rate swap has behaved as it would be expected and the surprise is because pension fund trustees didn’t understand what’ they had entered into by selling off in advance the value of surplus assets through derivatives.
Well, I'll freely admit I can't get my head around this, so I'll just hope you are right. Not least because I dipped in and bought some Direct Line and LG shares today, and the latter appears to be especially in the mix on this. I took the view the market was already pricing in some fall-out from this for them. I don't know if you have read/can read the article but there are some pretty heavy duty comments on there which seem a lot less sanguine than you are.
What was portrayed was the collapse of pension funds. That was not happening. Any pension funds which had no hedging or partial hedging saw significant surpluses overnight.
Schemes which hedged interest rate volatility stayed in equilibrium, no surplus or deficit - the whole point of hedging.
The problem was banks wanting additional collateral to cover the additional amounts pension funds now owed the bank under the derivative contract (more than coveted by its assets). If they only held gilts they had to sell them - and the main buyers of gilts are pension funds - so the market wasn’t there to prevent a chaotic market.
What the BofE did is what they are there for - to stabalise the market in abnormal conditions - it wasn’t to save pension funds. Pension funds benefit from high yield gilts and don’t care how low the price goes - it’s the market that collapsed - not pension funds.
Its an example of how a relatively simple derivative is seen as benign until it becomes apparent that unexpected events create liquidity issues for a counter party no one had foreseen.
The result will probably be pension funds holding equities to cover the risk of unexpected cash calls for collateral - end of problem no one thought of as their problem.
2x £25 for me (on now a reduced holding), 1x £100 for Mrs R7L, eldest daughter nowt, youngest 3x £25.
I’m very jealous of anyone winning £100 or more in a single win - never had more than £25 since buying PSBs 2 years ago. I’m up to the maximum now too. Out of interest, what’s the largest, single amount anyone on here has won?
2x £25 for me (on now a reduced holding), 1x £100 for Mrs R7L, eldest daughter nowt, youngest 3x £25.
I’m very jealous of anyone winning £100 or more in a single win - never had more than £25 since buying PSBs 2 years ago. I’m up to the maximum now too. Out of interest, what’s the largest, single amount anyone on here has won?
£150 for my father in law, he was simply born lucky! 1x £100 and 2x £25.
My largest single bond win is £100, my Aunt had a £500 about 3 years ago after I persuaded her to get some, won in her first month! (on £30k).
£25 on the premium bonds. Almost makes up the drop in my pension fund in the past quarter, when it went down by a staggering £87! That's partly because about 35% of it is in USD. 8% down YTD, which I'm not complaining about.
Easily my best month. Has the prize fund gone up with interest rates?
2.2% now I believe, was 1.4%
So in theory on the maximum holding on average you should win between £75 and £100 a month.
Really? Never got the email on that.
Aaand I got £200, I think I got that much once before but certainly no more than that.
If it's really 2.2% that is the highest for years and outpacing every single one of the six cash savings accounts I hold where I've distributed cash from the house sale. Hmm.
Easily my best month. Has the prize fund gone up with interest rates?
2.2% now I believe, was 1.4%
So in theory on the maximum holding on average you should win between £75 and £100 a month.
Really? Never got the email on that.
Aaand I got £200, I think I got that much once before but certainly no more than that.
If it's really 2.2% that is the highest for years and outpacing every single one of the six cash savings accounts I hold where I've distributed cash from the house sale. Hmm.
Comments
Vanguard are saying base rate to peak at 6% next year & then falling back to 3% by 2028. The fall would have been quicker had we not had the mini budget.
Inflation similarly to peak next year at 10.8% and then fall back to 2%-3% by the end of next year. They are saying that it will be some time since we had base rate more than inflation.
Bond values to start picking up & in Sterling terms UK equities have not performed as badly as other countries. Europe looking likeit's been oversold & they can see more gains here than elsewhere. The US is close to its long trend numbers & so the sell off there hopefully is almost done.
A 60/40 portfolio has shown returns of between 6%-8% over the long term and is still the go-to asset split for the balanced investor. So ride out this wave & look forward to positive returns next year.
Now to see what Jupiter think.
I think they are optimistic on the US. One of the analysts I follow say the S&P is fairly valued right now, assuming the current forecasts of 10% earnings YoY the next two years. If that turns out to be wrong - and we'll find during the October earnings season - the US could go down another 20% more on Nasdaq. And they're the optimistic crowd, hoping that earnings and forecasts hold out!
Another analyst I follow called this dip perfectly, despite generally being an optimist on the market (one the of the guys that taught me options trading and has been in the market since the early 70s). He reckons this is 73/74 all over again and there's a real risk of carnage in the next 6 months - 50% from the top. 3000 only takes us back to pre-pandemic levels, so makes sense to me, 2400 (50%) would be a not unreasonable overshoot.
Both analysts expect a bear market rally to at least 3900, btw before dropping again during earnings season.
I also very much doubt that rates will go to 6% - the debt market is very, very sensitive, so should require less of a rise to signal. I reckon the last week has probably put a brake on the housing market immediately and we'll see well overdue house price falls. Then the energy cap and falling commodities will bring inflation down relatively quickly. The 6-7% forecasts were all based on Nat Gas at more than double the price it is now and no energy cap. Plus, the Bank has already blinked.
Another data point is that my private equity clients have just given me my second turn-around project in two weeks - manufacturers with order books disappearing in weeks and cost bases being wrecked by power and materials costs. Other than fast-growing tech firms, I don't know a company that isn't looking to cut jobs, unfortunately. But Private Equity are also bargain hunting in UK/Europe due to the strong dollar, so I'm with them on being positive on UK/Europe medium to long-term.
Anyone able to recommend a [relatively] cheap and reliable place where I can sell them.
Seen the sellmysharecertificates.com site Anyone used it?
- hedging can be interest rate and inflation but its the interest rate hedging that is the main issue. For interest rate read yields. In the last year the 10 year Gilt yield has gone from sub 20bp ie 0.20% to over 400 bp, ie 4.00% plus. The hedging works when yields drop. However when yields rise there is a collateral call for cash to maintain the hedging. That covers the risk of the yield dropping again.
- Aside the political fau par of releasing a budget that was uncosted a week back the global rising yield was problematic because
- The Bank of England was just starting Quantitative Tightening, ie selling gilts into the market
- Pension funds needed cash for their yield hedge and needed it quickly so in many cases started to sell gilts
- Both of these parties had previously been the only real buyers of Gilts. That uncosted budget added a British factor to rising yields that did get out of control.
- On Tuesday the yield moved something like 30bp in a day. On Wednesday by 11 am it had moved the same and there was an absence of buyers. In effect an abnormal market and so BoE stepped in, changed tactic and became a buyer, until 14th October at least, ie back to QE. They did this at the long dated end and it has restored the market.
- Rising yields improve solvency, even if well hedged and paying away collateral the funding will be getting better. A sort of ‘wealth destruction’ insurance move that removes subjective judgement.
- The rise in yields will have significantly improved the funding in expectation and if appropriate a fund could derisk further now by selling equity and buying bonds. It would be helpful to buy bonds of broadly the correct duration. Also similarly the elements that are inflation linked, but there are IL gilts.
- The strange thing about all of this is that the pensioner population is the same and their expected life does not change on market conditions. What does change is the present value of the solvency reserve required simply because the acceptable discount rate is now much higher than hitherto.
- If gilts yield plus 50bp is the self sufficiency level then a discount rate of say 3.0% may be quite acceptable. If the scheme has no deficit then a switch to that asset delivering yield of more than 3% if it is the risk free asset, ie long gilt (20 year plus) suddenly looks a useful step. Meaningful yields are back on the table.
- Mortality is another matter and actually is not getting better post the pandemic, quite the reverse but TPR has the brakes on big changes in that just now.
- All of this is looking like positive news for most DB schemes.
- For completeness the reporting of insolvent pension funds may have referenced some LDI arrangements set up via limited company structures where the collateral calls could not be met fast enough, ie they could not meet their commitments due to speed and illiquidity in the gilt market. Usually all that occurs is that the hedging gets reduced but I can imagine somewhere out there is a structure without the relief valve. 12 month over 15 year FI Gilt performance is minus 40 % to last Monday. That is a lot of liability lost.
Edited from something I received but may be of interestHalifax meanwhile have their 5 year fix at 5.44% for all LTV's up to 90%. Their 2 year fixed is 5.84%.
Schemes which hedged interest rate volatility stayed in equilibrium, no surplus or deficit - the whole point of hedging.
The problem was banks wanting additional collateral to cover the additional amounts pension funds now owed the bank under the derivative contract (more than coveted by its assets). If they only held gilts they had to sell them - and the main buyers of gilts are pension funds - so the market wasn’t there to prevent a chaotic market.
Its an example of how a relatively simple derivative is seen as benign until it becomes apparent that unexpected events create liquidity issues for a counter party no one had foreseen.
The result will probably be pension funds holding equities to cover the risk of unexpected cash calls for collateral - end of problem no one thought of as their problem.
Largest ever win £100.
My largest single bond win is £100, my Aunt had a £500 about 3 years ago after I persuaded her to get some, won in her first month! (on £30k).
Easily my best month. Has the prize fund gone up with interest rates?
So in theory on the maximum holding on average you should win between £75 and £100 a month.
Aaand I got £200, I think I got that much once before but certainly no more than that.
If it's really 2.2% that is the highest for years and outpacing every single one of the six cash savings accounts I hold where I've distributed cash from the house sale. Hmm.
18
35
39
72
98
178
199
357
2,779
4,364
8,337
13,092
38,137
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